The collapse of global interest rates is expected to cause more capital to flow into alternative investment assets. Brookfield Asset Management has expertise in this area and a solid track record of buying undervalued assets and later selling them at a higher price.
Brookfield Asset Management (TSX—BAM.A) stands to benefit from the collapse of global interest rates. That’s because in a low-rate environment, ‘real assets’ and businesses tend to earn high returns on a relative and absolute basis. What’s more, returns can be leveraged for the long term at low interest rates. This can lead to strong cash returns.
Under these circumstances, global sovereign and institutional investors have increased allocations to the types of assets in which Brookfield invests. They invest their money with Brookfield because it’s one of the few places left for them to earn decent returns.
Brookfield is a leading global alternative asset manager with a 120-year history and over $385 billion of assets under management across a broad portfolio of real estate, infrastructure, renewable power and private equity assets.
FFO and revenues are up
A key financial metric used to assess Brookfield’s performance is its funds from operations, or FFO. From this standpoint and that of revenues, the company had a successful second quarter.
For the three months ended June 30, 2019, Brookfield’s FFO was $1.1 billion (all figures in US dollars unless otherwise noted), or $1.09 a share, compared with $790 million, or $0.77 a share, in the same period of 2018. Total segment revenues rose 27.7 per cent to $17.6 billion.
FFO includes realized disposition gains of $303 million in 2019, and $132 million last year. Excluding these gains, FFO increased by $147 million. This increase was primarily caused by recent acquisitions, higher realized carried interest and same-store growth. The latter reflected improved volumes and pricing at the renewable power segment’s hydrology business, higher volumes in its infrastructure segment’s utilities operations and improved margins at the construction business within the private equity segment.
Brookfield can quickly access capital
Low interest rates should continue to benefit Brookfield’s capital raising activities, resulting in strong, recurring fee-based profits. Meanwhile, the company should profit from its investments because of its scale, global reach and operational capabilities.
The recent $8.4-billion acquisition of the Genesee & Wyoming (G&W) railway is a case in point. First, Brookfield’s size and scale let it quickly access multiple sources of capital with which to acquire G&W. Second, the company’s global reach has given it experience with running railroads elsewhere in the world. And third, Brookfield wants to use its operating capabilities to improve G&W’s profit margins, maximize its commercial opportunities and realize value from alternate uses of the railway’s real estate.
BAM.A shares trade for 10.8 times this year’s forecast FFO of C$6.44 a share. Their annual dividend of C$0.85 a share yields 1.2 per cent. Brookfield Asset Management is a buy for growth and some income.
This is an edited version of an article that was originally published for subscribers in the October 25, 2019, issue of The Investment Reporter . You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter .
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